Tuesday, August 18, 1998 Last modified at 1:12 a.m. on Tuesday, August 18, 1998

Small oil producers getting squeezed by low prices

Associated Press

Oil prices have hit the lowest levels in 12 years, making motorists happy but leaving small oil producers scrambling to save their livelihood.

"The little guy is being forced out of business," said Frank Gorham, president of the Independent Oil Producers of New Mexico.

The association's own numbers tell the story. Membership has dropped from 300 to less than 100 in the past four years.

"A lot of us are suffering negative cash flow," Gorham said. "How long can you call the bank and say, `I cannot make payments'? You've got some very, very financially strong independents that are suffering right now."

Low prices have particularly hurt small producers who rely on marginal, or stripper, wells producing less than 10 barrels of oil a day. Some 74 percent of New Mexico's 24,000 wells are considered marginal. Nationally, just under 25 percent of the nation's daily production comes from marginal wells.

The problems of producers have a ripple effect on the rest of the industry, hurting mom-andpop companies that service the oil fields.

"For every one rig, you probably have 20 businesses that support that well, from chemical businesses to mechanical," said Harry Spannaus, vice president of corporate services for Pioneer Natural Resources in Midland, Texas, the area's largest independent.

Some small producers have cut back or eliminated new drilling projects. Some have laid off workers and left run-down wells unrepaired.

Others have "shut in" wells - stopping pumping, a solution intended to be temporary but which often results in permanent loss of production. Eventually, producers could end up plugging the well by pouring concrete into the hole and removing the surface equipment.

In a letter in June to then-Energy Secretary Federico Pena, the Independent Petroleum Association of America complained that eight months of low prices and price instability were forcing some producers out of business, while others shut down marginal wells.

Sen. Jeff Bingaman is pushing for the government to buy $420 million in oil for the Strategic Petroleum Reserve. His measure would replenish crude oil sold from the emergency stockpile over the past three years - helping producers by tightening supply.

"The plight of the oil and gas industry, and the oil industry in particular, has not gotten the attention it deserves," the New Mexico Democrat said recently.

Many producers also back legislation by Rep. West Watkins, R-Okla., and Sen. Kay Bailey Hutchison, R-Texas, that would give domestic oil producers tax credits of as much as $3 a barrel if the price of oil falls below $18 a barrel.

Some small producers have diversified into natural gas to stay afloat. Natural gas has less foreign competition and demand for it is increasing.

Most fields in New Mexico have a combination of oil and gas, Gorham said.

Dugan Production Corp. in Farmington is evenly split between oil and gas, said its president, Tom Dugan.

"We're able to exist on our gas production," he said. "Essentially our income has been cut in half within the last six or seven months."